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Why the Worst Companies Lost Big and How to Avoid Them

September 30, 2020

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Jon

There are a lot of ways to fail at investing. Owning the worst-performing companies is a big one. The solution is a matter of avoidance. Is there a way to find the worst performers in advance?

Henrik Bessimbinder, while researching the greatest companies, looked at the worst-performing companies by decades. He broke the worst performers into two categories: by returns and total shareholder wealth lost.

The difference between the two categories is a matter of total dollars versus the percentage lost. A huge company can lose billions of dollars in shareholder wealth with a tiny percentage loss while a tiny company can have a huge percentage loss only losing millions.

The top 200 companies in each category had a few characteristics that stood out during their worst-performing decade: Continue Reading…
The Pendulum Swings

September 25, 2020

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Jon

The first big market boom of the 1900s happened right at its start. 1901 would become “the bubble” everyone referred to until 1929 replaced it.

To say the bull market had seeped into the public mind would be an understatement. Speculation was rampant.

The year before, the market bottomed in late September, then took off on a 34% run to end the year. The market picked up right where it left off in 1901.

Seven days into the new year, a record 2,127,503 shares were reportedly traded. It was the first 2 million share day on the NYSE (to put that number into perspective, only 85,807 shares traded on August 22, 1900).

U.S. prosperity drove the boom initially but the first merger wave to hit the stock market pushed it to heights never seen before. One of the biggest was J.P. Morgan’s orchestrated buyout of Carnegie’s empire by his newly created U.S. Steel. It’s newly issued shares played right into the boom. Continue Reading…
What Makes Great Companies Great

September 23, 2020

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Jon

Investing in wonderful companies popularized by Warren Buffett is becoming more and more common. Successfully doing it is less common because they’re still hard to find without hindsight.

Henrik Bessembinder followed up his research on the greatest companies to see what characteristics made them great. He looked at the best 200 companies in two buckets — by greatest wealth creation and highest excess return by decade.

The difference between the two is like comparing a small $1 million market cap company that grows to $100 million versus a larger $10 billion company that grows to $100 billion. The small company produces a significantly higher return while the other creates more total wealth for shareholders.

The top 200 companies in each bucket had a few characteristics that stood out during their best decade of performance: Continue Reading…
What Has and Hasn’t Changed in Investing

September 16, 2020

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Jon

Ben Graham spent a lifetime teaching about the errors of our ways. He started his career in 1914. 33 years later he would find himself lecturing students on the problems in security analysis.

In his final lecture, he looked back at the entirety of his career, up to that point, to highlight the many improvements.

I would like to make some final observations, relating to a long period of time, as to what has happened to the conduct of business in Wall Street.

If you can throw your mind, as I can, as far back as 1914, you would be struck by some extraordinary differences in Wall Street then and today. In a great number of things, the improvement has been tremendous. The ethics of Wall Street are very much better. The sources of information are much greater, and the information itself is much more dependable. There have been many advances in the art of security analysis. In all those respects we are very far ahead of the past.

All of these things have continued to improve since the mid-1940s. And a couple of things can be added to Graham’s list as well, like lower trading costs and easier access to markets. Continue Reading…
Enduring Drawdowns in Wonderful Companies

September 11, 2020

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Jon

The stocks of great companies are not immune to deep drawdowns. In fact, it’s practically guaranteed to happen more than once.

Hendrik Bessembinder followed up on previous research with a deep dive into the greatest companies ever. His first conclusion shouldn’t be too surprising.

The most successful company investments in terms of wealth created for shareholders at the decade horizon also involved very substantial peak-to-trough drawdowns. Even those investments that are the most successful at long horizons typically involve painful losses over shorter horizons.

Bessembinder looked at the top 100 companies based on shareholder wealth creation by decade since 1950. He then measured the largest drawdown shareholders faced in that decade.

Investors in the greatest companies faced a drawdown of 32.5%, on average, despite being one of the greatest decades of performance ever. That was just the largest drawdown, on average. It says nothing of the second, third, and so on drawdowns during the same decade. Continue Reading…
The Downside of Chasing Huge Wins

September 9, 2020

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Jon

Most people know John Maynard Keynes the economist. Not many know Keynes the investor. The track record of his personal accounts and the King’s College Chest Fund show he was a decent, though risk-averse, investor.

One thing stands out when you compare the two records. He consistently used margin loans in his personal accounts. I wanted to take a deeper dive into the impact margin loans had on his results.

For those not aware, a margin loan is borrowed money used to buy securities in an attempt to juice returns. The results can be exceptional if things go right or horrendous when things go wrong.

When you borrow money against an asset, and the value of the asset falls, bad things can happen. The main reason is due to minimum margin requirements. Lenders don’t like to lose money any more than we do, so minimum margin requirements help safeguard lenders from losses.

But it doesn’t protect you from losses. In fact, the minimums do the opposite whenever it’s triggered. Because you’re hit with a margin call. Continue Reading…

Why the Worst Companies Lost Big and How to Avoid Them

The Pendulum Swings

What Makes Great Companies Great

What Has and Hasn’t Changed in Investing

Enduring Drawdowns in Wonderful Companies

The Downside of Chasing Huge Wins